Introduction
The European Central Bank (ECB) has reported significant advancements in controlling inflation, although potential price increases from U.S. tariffs warrant careful monitoring, according to ECB policymaker Isabel Schnabel.Context
During a conference in Dubrovnik on June 7, Schnabel noted that the ECB had recently paused its policy adjustments as it evaluates the growth and inflation landscape. This decision marks the eighth time in a year that the ECB has addressed interest rates, celebrating a return to the bank's target inflation rate of 2%.Developments
Schnabel emphasized the importance of remaining vigilant in light of external factors that could disrupt inflation stability. She mentioned a recent inflation figure that dipped below 2%, largely due to energy prices, but also noted a decline in more persistent inflation components, which she considered positive news.Croatian central bank governor Boris Vujcic supported these sentiments, suggesting the ECB was "nearly done" with rate cuts if inflation stabilizes at the 2% target. However, projections of 1.6% inflation for next year raised concerns among other ECB policymakers about the potential for a slowdown.
Schnabel highlighted the threat of a global trade war initiated by the U.S., explaining that research indicates a 1% rise in global producer prices could lead to an average 0.2% increase in domestic producer prices in major economies. She pointed out that tariffs would likely be inflationary, further exacerbated by retaliation from trading partners.
As an example, she noted China's restrictions on rare earth exports, which have caused disruptions in production for automakers. Additionally, Schnabel referenced ECB research on trade diversion, stating the limited impact of Chinese producers being shut out of the U.S. market).
She projected that ongoing trade tensions would have widespread effects across economies, thereby constraining the ECB's and U.S. Federal Reserve's monetary policy divergences.
Emerging from the same panel discussion, Bank of England policymaker Megan Greene expressed a different perspective, contending that trade fragmentation might actually reduce inflation in Britain, thereby allowing the Bank of England greater flexibility in its monetary policy.